You have $390,000 invested in a well-diversified portfolio. You inherit a house that is presently worth $230,000. Consider thesummary measures in the following table:InvestmentOld portfolioHouseExpected Return5%15%StandardDeviation13%18% e correlation coefficient between your portfolio and the house is 0.43.- What is the expected return and the standard deviation for your portfolio comprising your old portfolio and the house? (Do notDund intermediate calculations. Round your final answers to 2 decimal places.)Answer is complete and correct.Expected returnStandard deviation8.7112.58Expected returnStandard deviation%b. Suppose you decide to sell the house and use the proceeds of $230,000 to buy risk-free T-bills that promise a 10% rate of return.Calculate the expected return and the standard deviation for the resulting portfolio. [Hint Note that the correlation coefficient betweeany asset and the risk-free T-bills is zero.) (Do not round intermediate calculations. Round your final answers to 2 decimal places.)Answer is complete but not entirely correct.6.85 %10.56%

The riskfree asset does not have any risk. The value of standard deviation of a risk-free asset is…

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Expected return Standard deviation 10.56%

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Concept explainers

Risk and return

Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.

Capital Asset Pricing Model

Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.

Question

You have $390,000 invested in a well-diversified portfolio. You inherit a house that is presently worth $230,000. Consider the
summary measures in the following table:
Investment
Old portfolio
House
Expected Return
5%
15%
Standard
Deviation
13%
18%

e correlation coefficient between your portfolio and the house is 0.43.
- What is the expected return and the standard deviation for your portfolio comprising your old portfolio and the house? (Do not
Dund intermediate calculations. Round your final answers to 2 decimal places.)
Answer is complete and correct.
Expected return
Standard deviation
8.71
12.58
Expected return
Standard deviation
%
b. Suppose you decide to sell the house and use the proceeds of $230,000 to buy risk-free T-bills that promise a 10% rate of return.
Calculate the expected return and the standard deviation for the resulting portfolio. [Hint Note that the correlation coefficient betwee
any asset and the risk-free T-bills is zero.) (Do not round intermediate calculations. Round your final answers to 2 decimal places.)
Answer is complete but not entirely correct.
6.85 %
10.56%

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Example 9: What is the portfolio standard deviation for a two-asset portfolio comprised of the following two assets if the correlation of their returns is 0.5? Asset A Asset B Expected return Stańdard deviation of expected returns 10% 20% 5% 20% Amount invested 740,000 760,000
Description Provide the portfolio percentages to accomplish the following: 1. 5% chance of loosing at most $50,000 2. 5% chance of losing at most $75,000 3. Maximize the value of "Expected returns - 0,1*VaR"
Suppose you are an investor with a choice between three securities that are identical in every way except in terms of their rates of return and risk. Which investment provides the highest expected return? Investment A: total return= 10% with profitability 50% total return= 20% with profitability 50% Investment B: total return= 12% with profitability 50% total return= 18% with profitability 50% Investment A: total return= 5% with profitability 60%
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